Cache Logistics Trust - Operational weakness to persist

Maintain HOLD, TP unchanged at S$0.93.

Maintain our HOLD call on Cache Logistics Trust (Cache) on uncertainty regarding the outcome of the holding arrangement with Schenker. This currently has a negative impact on outlook and portfolio valuation.

While yields are attractive at 8.5%, we believe that uncertainties owing to the oversupply in the overall Singapore warehouse market and more pressure on Cache’s organic growth potential will cap rerating opportunities.

Interim solution to 51 Alps Avenue a key overhang.

3Q16 DPU fell 13.7% y-o-y on the back of an enlarged share base. Looking ahead, we expect pressure on earnings arising from the holding arrangement with Schenker in relation to 51 Alps Avenue until the Court’s final judgement of the dispute. In the interim, Cache has agreed to receive in “protest” Schenker’s rent of S$0.77 per square foot (psf)/ month until further resolution.

Under the worst-case scenario, FY17F DPU will drop by 4.0% to 7.2 Scts.

We understand that the decline in future cashflows will also result in a c.S$44m write-off on the property valuation and thus, gearing may inch higher to c.42%.

Cache may need to address its gearing in the near term.

A scenario of higher gearing of 42% (vs 45% regulatory cap), which is above the management’s comfortable level of 35-40% is likely to result in an overhang in the share price of Cache in the immediate term.

We believe that the Manager may consider divestments or acquisitions (funding through equity) to pare down its gearing. Depending on the strategy, potential DPU dilution is possible, this has not been factored in our model yet.

Valuation

Our target price remains at S$0.93.

Maintain HOLD.

Key Risks to Our View

Schenker’s rent dispute. The rent dispute at 51 Alps Avenue (Schenker Megahub) is pending the Court’s resolution with an uncertain timeline. If the Court rules to settle the rent significantly below the market price (which is also our assumption), there could be further pressure on TP and DPU.

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